Archive for September, 2018

Institutional Investors vs. ‘Mom-and-Pops’: A Closer Look at Today’s Investment Landscape

Friday, September 28th, 2018

By Suzanne De Vita

Institutional Investors vs. ‘Mom-and-Pops’: A Closer Look at Today’s Investment Landscape

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With building confined to higher price tiers and homeowners listing-wary, housing has been strapped for supply. Now, with inventory mildly starting to steady, the earliest factors are falling away—including institutional investors, who, in the crash, converted homes to rentals, effectively eliminating a portion of supply.

When the bubble burst, foreclosures shot up—and at the ready was Wall Street, buying up distressed properties, many in the single-family space. In 2013, institutional investors were responsible for roughly one-tenth of transactions, according to ATTOM Data Solutions—snapping up supply that, in a few years’ time, would be desperately needed.

Fast-forward to the present. Equipped with predictive software, institutional investors are pinpointing promising properties—in bulk, and with laser-like precision. By applying big data, they are able to determine where to invest and whether renovations are required, plus projected value and yield. As profiled recently by the Wall Street Journal, some are even able to detect intangibles like a “sunny kitchen,” as well as generate offer recommendations. With algorithms assigned to the heavy lifting, they are able to choose criteria and find fitting homes by the tens of thousands—and they do own tens of thousands, generally in the suburbs.

Their best bets have been homes in the Midwest and South, where the median preowned prices are $208,500 and $227,900, respectively, according to August data from the National Association of REALTORS® (NAR). Atlanta is a big draw for institutional investors, as well as Dayton, Ohio; Indianapolis; and Memphis, ATTOM reports.

Are they, however, as impactful now as perceived? According to ATTOM, of all home sales in the second quarter of this year, institutional investor sales totaled 2 percent; and according to NAR, in August, they made up 13 percent of preowned property sales—a come-down from 15 percent the prior year.

“There is less appetite for institutional investors to get into the market,” Lawrence Yun, chief economist at NAR, tells RISMedia. “They went into the market during the deep downturn, and purchased at a very attractive, low price, with sizeable capital gains…and rents are still decent.”

According to Yun, there is no clear-cut indication institutional investors will offload properties. The median national rent is $1,440, per the Zillow Rent Index (ZRI).

“With the economy doing well, there will be a conversion of renters to homeowners, so I foresee rents moderating in the next two years,” Yun says. “It’s unclear, however, if there will be any measurable unloading of those inventory onto the market.”

Additionally, while institutional investors are making plays—albeit at a lesser rate—there other entities to watch, says Daren Blomquist, senior vice president at ATTOM Data Solutions.

“As much as the larger institutional investors get a lot of attention and headlines around buying up housing inventory, right now they are only accounting for about 2 percent of all sales,” Blomquist tells RISMedia. “It’s the smaller mom-and-pop investors who are collectively eating up more housing inventory. Our data shows that individuals or entities who own one or two investment homes account for 78 percent of all single-family rentals—although we are seeing more of those mom-and-pop investors graduate up to own more properties over the past year.

“This long tail of smaller investors are taking a substantial bite out of inventory, and often competing with first-time homebuyers in terms of the type of inventory: starter homes,” says Blomquist.

According to data from Trulia, there was a 14.2 percent deficit at the entry level in the first quarter of this year—and although there is demand for starters, given that expenses are high and labor is lacking, builders are looking to maximize returns in other tiers.

As for the investors in the market today? With cash to front, they are beating out homebuyers in multiple-offer scenarios, who generally have limited resources to spare.

“It is a bit of a chicken-and-egg scenario: Are the investors taking advantage of a market with low homeownership rates driven by folks who don’t qualify to buy, or don’t want to take on the debt and responsibility that comes with homeownership—or are investors causing this low homeownership scenario by outbidding prospective owner-occupant buyers?” asks Blomquist.

“I would guess it’s a bit of both, with the former being more prevalent early on in the recovery and the latter being more prevalent recently.”